IB Quits options game!

[Sig]

The US is the only country in the world that uses fragmented markets and allow brokers to sell retail flow indiscriminately to high frequency trading firms. The US is the only country where brokers don't have to guarantee the best price Fills across exchanges. In Europe, they have to track data to prove that their clients got the best price or they are fined by the regulator. The US looks more like a third world country much like its infrastructure. My guess is that IB knows that this game will not be allowed to continue forever. Much like DB getting out of the triple leveraged ETF business which is also rigged against the retail investor.

The business model detailed in the investor agreements we all signed, state that they sell our flow for $1.50/contract to market makers who think they can exploit us. I always hated this model and the difficulty in getting fair execution. The market makers are well capitalised and simply take the other side of retail Traders who use leverage and stop loss orders. Who wouldn't want to be the market maker in that scenario? Why would IB want to help them instead of their own customers? Longer term they would rather have their own customers trading with each other and keeping the profits within their own clients. They also avoid lawsuits in the future once people understand how that whole relationship works and retail investors were exploited.

I'm going to put more order flow through IB going forward and much less with TD.

Try trading SSF to see a marketplace with no MMs.

 

[Zzzz1]

Absolutely agree with everything. I could not have put it better. People have to stop being brainwashed and need to speak up against this ridiculously fragmented market system. Most don't even realize how shortchanged they are under the current system.

The US is the only country in the world that uses fragmented markets and allow brokers to sell retail flow indiscriminately to high frequency trading firms. The US is the only country where brokers don't have to guarantee the best price Fills across exchanges. In Europe, they have to track data to prove that their clients got the best price or they are fined by the regulator. The US looks more like a third world country much like its infrastructure. My guess is that IB knows that this game will not be allowed to continue forever. Much like DB getting out of the triple leveraged ETF business which is also rigged against the retail investor.

The business model detailed in the investor agreements we all signed, state that they sell our flow for $1.50/contract to market makers who think they can exploit us. I always hated this model and the difficulty in getting fair execution. The market makers are well capitalised and simply take the other side of retail Traders who use leverage and stop loss orders. Who wouldn't want to be the market maker in that scenario? Why would IB want to help them instead of their own customers? Longer term they would rather have their own customers trading with each other and keeping the profits within their own clients. They also avoid lawsuits in the future once people understand how that whole relationship works and retail investors were exploited.

I'm going to put more order flow through IB going forward and much less with TD.

 

[Stymie]

Try trading SSF to see a marketplace with no MMs.

You want to talk about real markets with centralised trading and no selling of order flow? Korea and Hong Kong futures are more liquid then the US when it comes execution and is far superior. These markets can be traded over IB and they don't create volume (Churn) like US markets to trick you into thinking you will get better fills! US market makers play with themselves until retail orders come in and then the games begin in earnest. I say this having traded them all and looking at my profits. Big difference.

 

[Sig]

You want to talk about real markets with centralised trading and no selling of order flow? Korea and Hong Kong futures are more liquid then the US when it comes execution and is far superior. These markets can be traded over IB and they don't create volume (Churn) like US markets to trick you into thinking you will get better fills! US market makers play with themselves until retail orders come in and then the games begin in earnest. I say this having traded them all and looking at my profits. Big difference.

You're confusing two completely different things, market making and selling order flow. Market making doesn't require selling order flow and is absolutely essential to a functioning market. There are certainly entities acting as market makers on Korea and Hong Kong futures markets.

Payment for order flow (or identically directing order flow to your wholley owned sub), on the other hand, I find difficult to defend unless you're in a situation like Nadex with a new exchange and you need to demonstrate viability of the marketplace to attract third party MMs and reach critical mass in volume. My inclination is that we'd be almost universally better off without it absent those edge cases, although there may be some benefit to the overall market that I'm not aware of.

 

[Stymie]

In IBs case, their interests are in exactly the same conflict with their customers when they internalize to TimberHill or direct order flow to TimberHill.

People struggle to understand the conflict of interest until IB unilaterally increases margin on outstanding futures contracts. They do this when they see that their customers are too big on one side of the market and increasing margins force people to liquidate positions for a loss and locking in profits for Timberhill! The billion dollar fines on banks for putting profits ahead of customers is getting the attention of all the other players.

 

[truetype]

Try trading SSF to see a marketplace with no MMs.

The real size is traded offscreen in SSFs. MMs facilitate this trade, but don't post on the visible CLOB.

 

[Stymie]

You're confusing two completely different things, market making and selling order flow. Market making doesn't require selling order flow and is absolutely essential to a functioning market. There are certainly entities acting as market makers on Korea and Hong Kong futures markets.

Payment for order flow (or identically directing order flow to your wholley owned sub), on the other hand, I find difficult to defend unless you're in a situation like Nadex with a new exchange and you need to demonstrate viability of the marketplace to attract third party MMs and reach critical mass in volume. My inclination is that we'd be almost universally better off without it absent those edge cases, although there may be some benefit to the overall market that I'm not aware of.

Just to be clearer, the argument has been that client execution is better when directing order flow to a facilitator. My point is that it's not better but worse! Yes - conflicts of interest. Bad - internalize order flow. In the US, the difference between market making and facilitator is blurred. They are the same companies or related! Try trading Asia exchanges and experience the real difference. Make more money where venue is fair.

 

[Sig]

The real size is traded offscreen in SSFs. MMs facilitate this trade, but don't post on the visible CLOB.

MMs don't "facilitate" anything, they take one side of a trade. A broker facilitates a trade, a MM takes a side of a trade, pretty much by definition. There are no MM on the vast majority of the SSF contracts, and if you post a limit order it won't be hit by anyone unless you're way out of market to your disadvantage and someone happens along to see it.
I think you're describing how an OTC market works, which is my point exactly. An OTC market requires a high touch broker enabled trade, which requires size to make it economical, and which also isn't very conducive to trading time-wise. If you want a market to look like what you've come to expect on any U.S. exchange you have to have MMs except maybe for the most liquid of contracts like ES.

 

[i960]

People struggle to understand the conflict of interest until IB unilaterally increases margin on outstanding futures contracts. They do this when they see that their customers are too big on one side of the market and increasing margins force people to liquidate positions for a loss and locking in profits for Timberhill! The billion dollar fines on banks for putting profits ahead of customers is getting the attention of all the other players.

Unless TH coincidentally decides to stand on every level of the book for a given contract this simply isn't happening in reality. There is no internalization in futures.

All the major entities are market making all the significant futures exchanges. US vs Asia has nothing to do with it.

 

[JackRab]

People struggle to understand the conflict of interest until IB unilaterally increases margin on outstanding futures contracts. They do this when they see that their customers are too big on one side of the market and increasing margins force people to liquidate positions for a loss and locking in profits for Timberhill! The billion dollar fines on banks for putting profits ahead of customers is getting the attention of all the other players.

I don't see how TH will profit from people liquidating positions... TH is not your counterparty, even if they might trade against you, in a centralized counterparty system there's hardly any chance that you trade in AND out with the same party.
Or do you think that TH will have the exact opposite position of all IB clients combined? Nope...